Home Equity is the amount of money you have already paid against the value of your home. The simple formula for determining your home equity is to subtract the amount of the mortgage balance from the current fair market of your home. In other words, your equity increases as your mortgage balance decreases. If your home has been appraised for $200,000 and you owe $125,000 on your mortgage, your equity is $75,000.

Many people put their established equity to work for them. They borrow against it and use the money for improvements to the home, for college tuition for their children, or for things like investments in business ventures such as purchasing additional property.

This is typically done through a home equity loan or a home equity line of credit. A home equity loan is a secured loan based on the amount of equity you have in your home. You may be able to borrow almost the amount of your equity, but remember your home is the collateral for such a loan. This type of financing also should be considered carefully, and homeowners must read all the fine print and discuss all fees before securing such a loan.

A home equity line of credit is usually about 75% of the appraised value of the home minus the balance due the current mortgage as well as any other liens. A home equity line of credit can be used at any time for any purpose, but there are several fees associated with a home equity line of credit. Choose a lender that offers competitive rates and does not eat up a large chunk of your loan with assorted fees.